Do it yourself

Given the turbulence in financial markets, it is common to frequently hear some uncomfortable questions (FA-u-Q). Overwhelmed with hope, fear and greed, these questions are uncomfortable because we cannot answer those questions with any degree of certainty or confidence in the argument.  Some of the questions, we are afraid to hear are as follows: How much more downside is left? The potential downside in a falling market and upside in a rising market are always daily rolling targets. Technical targets are usually conditional (e.g., “if market falls below this level, it could go to that level else…) and generally do not account for exceptional moves. Price targets based on fundamental valuation and historical discounting trends are dependent on materialization of multitude of complex forecast regarding likely revenue, profitability, cash flows, capex, project execution, policy environment etc. At the close of the market on 25 th June 2013 we could say that if market s...

The market reaction to the Fed chairman’s reiteration of his long standing and much publicized position on the continuation or otherwise of quantitative easing is not puzzling to us. In our view, most investors do not believe what they already know. “I knew it” is probably the most often used regret phrase in history of mankind. In his recent blog post BoB Mcteer, former member of FOMC put this succinctly. We feel quoting from that works well for us: “Writing about unknown unknowns would be more interesting, but I don’t know what they are. Instead, I will focus here on some unknowns that have been bothering me. Most have to do more or less with the efficient market hypothesis, whose logic I find compelling and whose exceptions I find confounding. Most recently, Chairman Bernanke, in his last two post-FOMC press conferences, said what most people in the markets expected him to say and what the logic of the situation called for. Given the still weak economy the present d...

Ben Bernanke in his recent speech highlighted that speculation may be playing a large role in rise in price of nearly everything. Now a hint that free and easy cash might not last till infinity a great rush is seen globally to hoard cash. Historically, it has meant a vertical crash in asset prices. We do not yet know if it is different this time. However, in domestic context we dare to think a few things that could make our worst case ugly. It is not that nobody has spoken about these things anytime. It is just that only a few are willing to believe what they know. We would like the readers to consider the following: Rate hike: US yields are moving fast towards 3% mark. Presently INR hedging cost is close to 5%. Meaning soon it will be un-remunerative to put money in Indian debt yielding ~8%. We know but not willing to believe that the current account problem may soon become a balance of payment of problem just like 1991. Rate hike is perhaps the only option RBI has to avoi...

Almost all governments in past 25years have adopted similar economic policies consistently irrespective of their form (single party or multi party) or constitution (minority or majority). The policy risk therefore in India is therefore reasonably predictable. For example consider the following: (a)    The process of meaningful tax reforms was started by the then finance minister V. P. Singh (Congress 1984-89) by rationalizing the tax slabs, lowering maximum marginal tax rates substantially, rationalizing wealth tax and introducing CENVAT. The recommendations of Raja J. Chelliah Committee (1991-93) on tax reforms constituted by the government (Congress 1991-96) have since formed the basis of tax reforms in India. All successive governments have implemented these recommendations. No government has sought to reverse or alter the process started by Congress government (1984-89). These recommendations form the core of the proposed Direct Tax Code. Committees formed ...

Prior to 2009 elections, the scare of  communists and Mayawati coming to power was so pervasive that nobody was willing to even reason why the communists were bad and why it was not questionable for Dr. Manmohan Singh to risk the government in the extremely tough global conditions, for civil nuclear deal whose benefits, if at all, would be seen only beyond 2020. In our view equal credit for MNREGA and RTI, two major reforms done during UPA I  should be given to the communists, who ensured that the Congress Party stays focused on the promise of inclusive growth and accountable administration. We do not consider UPA II a coalition. TMC, NCP, DMK all have same socio-economic agenda as the Congress. Heading into a major election, especially when the outcome is as uncertain as it could be, it is natural for investors to be jittery about the politics & policy environment and its likely impact on the financial markets. We however find little evidence to sugges...

Also read other posts in this series: Keep it simple INR  QE QE a matter of fact, not going anywhere . Economic growth in India Current account deficit Interest rates Thought for the day “Nothing defines humans better than their willingness to do irrational things in the pursuit of phenomenally unlikely payoffs. This is the principle behind lotteries, dating, and religion.” -            Scott Adams (1957 - ) Word of the day Phosphoresce (v): To be luminous without sensible heat, as phosphorus.  (Source: Dictionary.com) Shri Nārada Uvāca Most good things keep company with problems. Good monsoon has disrupted the normal life greatly. Expect June food inflation to spike sharply, before it comes down later.

‘Interest’ is the compensation for one of the most important resource needed for production, i.e., ‘capital’.  The rate of interest in short term mostly depends on the forces of demand and supply much like for other sources of production like labor (wages), land (rent) and raw material. However, over a longer period there are many factors that structurally impact the demand and supply of capital and therefore influence the rate of interest demanded and offered for use of such capital. The benchmark or policy rates established by the regulators or central bankers theoretically play a critical role in determination of interest rate structure in an economy under normal economic conditions. However, in extreme cases policy rates may fail to transmit to the ultimate provider or user of capital. Indian economy presently is passing through such extreme conditions. Therefore, policy rates established by RBI are not as effective as these should be under normal circumstances. ...

In past there is virtually no trend as to how market reacts to a rate cut or hike. However, the only time the rate cut happened after a 5% or more market rally in the preceding month was in January 2009. The market fell 3% in the month following the rate cut. On four occasions since 2001 Sensex has fallen 5% or more in one month preceding the rate cut. On two of these occasions, Sensex was also down one month after the cut.  In our view, rate decision today will have little impact on the market direction in next one month.

Our policy makers, regulators, economic commentators and analysts have all expressed their grave concerns over the swelling current account deficit (CAD) of India. However, we have not seen any concrete steps to address the roots of the problem. Most of the efforts seem to be focused on containing the legal import of gold and attracting more foreign debt so that at least balance of payment could be maintained. Last week the finance minister suggested that if Indians could restrain themselves from buying gold for one year, current account situation will improve dramatically. Current account measures trade, international income, direct transfers of capital, and investment income made on assets. A current account deficit occurs when a country's government, businesses and individuals import more goods, services and capital than they export. Theoretically, CAD arising from trade deficit is never a risk in itself. The excess of imports over exports essentially means that our ...

Today in a significant development the Sharad Yadav and Nitish Kumar led Janta Dal (United) decided to part ways with NDA. The immediate consequences of this decision include: (a)     Exit of BJP from the NDA government in Bihar. Bihar will now have a solo JDU government. Though technically JDU is 4MLAs short of simple majority mark in the state assembly, there is no apparent threat to the government as some Independent and Congress MLAs would be happy to extend support to the government. (b)    The Congress led UPA II government at the center can breathe easy for the time being as it gets another potential “outside supporter” in JDU, should SP or BSP threaten to withdraw their support. Implying that the elections though look imminent would happen only in 2014. Though JDU is limited to Bihar only, this move may have larger national implications in future. For example: (1)     As things stand today the...

In our view India has a potential grow 6-6.5% on sustainable basis over next decade. This rate of growth is excellent provided we make it inclusive and sustainable. Hopes of getting back to 8%+ growth trajectory on sustainable basis would only fuel frustration and motivate inaction. In prelude to general election no government would want to admit a serious economic collapse, but the fact is that after growing over 8% (seasonally adjusted 5yr CAGR) during FY08 to FY12, the Indian economy has slowed down to more sustainable 6- 6.5%. The optimists would want to believe that low growth is a temporary phase and we would soon get back to 8%+ trajectory. However, there is small section that accepts that 8% growth in current context is not only unsustainable but undesirable also. We are in the second school. In our view, Indian economy and people are not yet prepared for higher growth, for the simple reasons: (a)    The current status of basic infrastructure, b...